1HFY20 CNP of RM234.1m (+1.2% YoY) is within expectations. While we expect weaker quarters ahead amidst the current pandemic outbreak, we continue favoring the group for its resiliency and sturdy fundamentals as one of the large-cap F&B counters, which could offer some comfort under the current market uncertainty. Maintain OP with a higher TP of RM36.20, as we roll forward our valuation base year to FY21.

No surprises. 1HFY20 Core Net Profit (CNP) of RM234.1m came in within expectations at 54% of our and 55% of consensus’ estimates. Note that 1H historically takes up c.55% of the group’s full-year earnings. An interim dividend of 27.0 sen was announced, as expected.

Boosted by Thai operations. YoY, 1HFY20 CNP rose marginally by 1.2%, mainly supported by its Thailand operations, which saw operating profit rising 7% on the back of stronger sales, lower raw material costs as well as favourable forex. However, this was partially shadowed by weaker performance from F&B Malaysia, which saw revenue and operating profit declining 1% and 10%, respectively. These were largely attributed to higher dairy input costs as well as weaker sales locally amidst the enforced MCO (Movement Control Order) which started from 18 March. For the individual quarter of 2QFY20, CNP was weaker by 4% YoY. This was largely dragged by lower operating profit from its Malaysia operation (-14%), which was dampened by: (i) earlier CNY sell-in this year, (ii) subdued sales during MCO, as well as (iii) costlier dairy spends.

QoQ, 2QFY20 revenue and CNP slipped 10% and 23%, respectively, greatly dampened by the earlier Chinese New Year sell-in in 1QFY20, as well as the weaker consumer demand for both F&B Malaysia and F&B Thailand, amid the current COVID-19 outbreak.

Expecting weaker quarters ahead. Against the backdrop of the current pandemic outbreak, the group is anticipated to experience softer earnings moving forward. This is premised on an expected weaker demand, following the imposed movement restrictions, as well as the shift in consumer purchasing behaviour. We expect sentiment to remain cautious even post-MCO, with further clarity depending on the eventual duration of the pandemic outbreak. On the other hand, while the group has faced a set back with its failed acquisition of MSM’s Ladang Chuping land, we are nonetheless positive on the group’s intention to continue pursuing the dairy farm plan. The current weak economic environment may work well to its advantage as there may be other more attractivelypriced land offers. Recap that in the longer-term, the said plan would aid the group in expediting growth within the fresh milk segment on the back of more competitive cost advantages.

Post-results, we revised our FY20E and FY21E earnings downwards by 5.7% and 2.9%, respectively, as we pencilled in the aforesaid weaker demand for both F&B Malaysia and F&B Thailand.

Maintain OUTPERFORM on a higher TP of RM36.20 (from RM35.20) as we roll forward our valuation base year to FY21 with an unchanged ascribed 30.0x PER (closely in-line with +0.5SD over the stock’s 3-year mean). While we are expecting the upcoming quarters to be soft amidst the pandemic outbreak, we still like the group for: (i) its sturdy fundamentals and resiliency which could provide some form of comfort under the current market uncertainty, coupled with (ii) premium valuations attached to large-cap F&B stocks in lieu of their earnings defensiveness. Yet, dividend could be a slight dampener with the anticipated low yield of c.2%. Risks to our call include: (i) slower-than-expected growth in Thailand F&B business, and (ii) higher-than-expected operating costs.

Source: Kenanga Research - 5 May 2020